07 Feb What is Macroeconomic Stability
What is Macroeconomic Stability- Today Current Affairs
In an economy Inflation, Forex rate, GDP growth rate, Export and Import, Consumption and Investment are macroeconomic indicators, as they will be seen collectively for the whole country and the whole economy. These indicators should be consistently favorable to the country for the economy, then it will be called as macroeconomic stability.
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In case of inflation it should not be very much as well as should not be very much low. High inflation affects the poor more because the marginal utility of money for them is high. So a high rate of inflation should not be favorable for any economy because even if there is no absolute poverty in any country, it will be having relative poverty for sure. For a country like India which is having a sizable population of absolute poor, higher rate of inflation should never be persisting.
At the same time if inflation goes negative (which is called deflation) the economy can face slow down, recession or depression. Actually in case of deflation, The producers in the economy do not go for higher levels of production or say they slow down the production, as they assume the deflation is a sign of reducing demand. And when demand is decreasing nobody would be taking risks by producing more. The Economy can witness slow down because of the action or better to say inaction of producers. Hence the tolerable Band of inflation is kept between 4 to 6% in terms of CPI combined. If the RBI and the monetary policy committee is successful in keeping the inflation rate between 4 to 6% then it will be said that we are having macroeconomic stability (in terms of inflation).
Second most important macroeconomic indicator is GDP growth. GDP growth should be on the higher side as much as possible but at the same time should be consistent. The real GDP growth indicates that the country has produced more goods and services that previous year. The increased goods and services will result in the enhanced standard of living of the people of the country. The GDP growth on the higher side makes sure that employment levels are on the higher side. More than employment, more will be the money in the hand of people, more the money in the hand of the people more will be the aggregate demand, more will be the aggregate demand producer would be producing more, producer would be producing more by hiring more people and this cycle should go on. The growth rate of GDP should be towards achieving the potential growth the economy can have, or the economy should grow at least by the previous year’s percentage growth. When the economy goes like this it will be said that the economy has macroeconomic stability ( in terms of consistent GDP growth). But sometime the unforeseen situations like fall down Of major Financial Institutions, or covid kind of unprecedented situation makes the economy go towards slowdown and recession, And here the government plays important role in recovering the economy by doing more expenditure some time on the basis of printing money ( which is called as deficit financing). The Hindu Analysis.
Forex rate means the price of Dollar in terms of rupees in the Indian context, should be stable so as to favor the Indian economy. The depreciation of rupee or the appreciation of rupee, both are not very much favorable for the Indian economy. In case of depreciation of rupee our imports become costly and in imports the major is crude oil. So because of this petrol and diesel prices in the country increase which results in inflation. Today Current Affairs.
Hence in the Indian context the depreciation of rupee results in inflation.
The depreciation of rupee also makes our exports competitive in the international market, But looking into the fact that the Indian industry is not that vibrant we are not producing export surplus. Hence the good outcome which we could have, could not be achieved.
But when it comes to China, the depreciation of Yuan benefits Chinese exports a lot because they are able to produce a lot more export surplus. The Chinese economy favors the depreciation. The Hindu Analysis.
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At the same time when it comes to appreciation of rupee, our products in the international market become costly. It can result in reduction of exports from India and Dollar earning of India could be less.
Hence Stable Forex rate favors the Indian economy and RBI tries its best to keep the Forex rate stable as it is one of the mandates.
In any case export should be higher than import then it will be said as macroeconomic stability. but in the case of India, import is higher than export. The Trade balance of India that is nothing but export minus import of goods, is deficit for long.
Consumption and Investment both should also be on a higher side for better macroeconomic stability. The portion of investment should be on the more as it results in capital formation or asset creation, especially for a developing country like India.
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Md Layeeque Azam, Economics Faculty